COMPETENCY LICENSING OF BUILDING CONTRACTORS

INTRODUCTION

Competency licensing requirements for building contractors is an emerging argumentative issue in the construction industry. The subject stimu­lates both emotional and pragmatic responses when discussed and usually triggers either strong positive or strong negative reactions. As late as 1986, only 31 states had any form of building contractor licensing requirements and of these, only 14 states required competency exams for their resident and non-resident builders.

This paper will explore the issues of competency licensing requirements including the background history, the appropriateness of licensing of builders, and various unique and innovative state builder licensing laws. The objective is to provide a forum to spark positive opinions and initiatives which hopefully will lead to the enhancement of construction education, ethics, and professionalism in the industry.

The term "Building Contractor," unless otherwise noted, is a collective description of the building trade family including general contractors, specialty contractors, commercial and institution builders, and residential builders.

Background

Occupational licensure has a long history. Its roots are planted in workers' guilds which can be traced back to the tenth century in England. The first effort to regulate occupations and profes­sions in relatively modern times was Virginia's medical practice act of 1639. In the late 1800's, state licensure activity began in earnest in the U.S. and by 1900, a majority of the states had licenced attorneys, dentists, pharmacists, physicians, and teachers. Between 1900 and 1960, most states also licensed an additional twenty occupations and professions including account­ants, nurses, real estate brokers, architects, engineers, barbers, hairdressers, chiropractors,

and funeral directors. Today, according to information provided by the Clearinghouse on Licensure, Enforcement and Regulation, over 800 different occupations are licensed by one or more states.

Occupational licensing is an exercise of the state's inherent police power to protect the health, safety and welfare of its citizens. Generally accepted criteria for granting licen­sure includes: 1) unqualified practice poses a serious risk to a consumer's life, health, safety, or economic well being; 2) such risks are likely to occur; 3) the public cannot accurately judge a practitioner's qualifications; and 4) benefits to the public clearly outweigh potential harmful effects of licensure (such as a decrease in the supply of practitioners). According to the Clearinghouse, failure to meet these crite-

ria, in general, indicates that licensure is not justified or that some form of less stringent regulation such as registration or certification may be appropriate.

.Critics argue, however, that licensure restricts entry into the profession, decreases competition and innovation, and results in higher cost of services to consumers. They also argue that while licensing and entry level training and education requirements may promote a minimum level of competency at the time of the initial license, licensing boards in general have done little to ensure that practitioners maintain competency and have not aggressively stripped incompetent and fraudulent practitioners of their licenses.

In the 1970's and early '80's, several trends contributed to creating a small but continuing revolution in occupational and professional regulation:

Central agencies differ widely in their statutory mandate and authority over board decisions. In a majority of states, the central agency is responsible for administrative functions such as processing applications, issuing licenses, record keeping, fee collection, and routine correspon­dence, while the boards continue to exercise primary policy-making powers such as conducting examinations, exercising disciplinary authority, and drafting administrative regulations. In .other states, such as Illinois, New York, Michigan, Florida, and Connecticut, the central agency's power extends to authority over board personnel, budgets, investigations, and examina­tions.

Opponents. of the trend toward centralization of licensure by the establishment of umbrella agencies contend that it adds to bureaucracy and red tape and reduces the responsiveness of the licensing authority to both licensure needs and citizen protection. They further argue that individual licensing boards with professional members best understand the issues of examina­tion, professional practice, and discipline.

The issue of an ideal structure to develop and administer licensing statutes remains unresolved. There is, however, the following commonality of features contained in most professional licensing legislation which provides necessary professional characteristics and administrative controls.

WHY LICENSE BUILDERS?

Although controversy remains regarding the most effective organizational form to establish and regulate licensing requirements, the appropriate­ness of competency licensing of building contractors is a basic question to be addressed and resolved. Other professional members of the building delivery team have a much clearer focus and defined objective regarding competency requirements. The board of directors of the American Institute of Architects recently adopted new and integrated public policies developed by the AIA's licensing law task force. The new approved policies reaffirm that the AIA "believes that the practice of architecture must be licensed to protect the public health, safety, and welfare" and calls for standards of licensure "based on minimum levels of competency relative to education, experience, and examination to insure that the public interest is served".

Clearly evident in the professional architect's ethics is the concern to serve the public in the highest and most competent manner possible. What then is the stand taken by peer construction organizations? A recent review of the national policies promulgated by four of the largest and most influential construction organizations in the United States, the AGC, ABC, AIC, and NAHB, reveals that the various groups collectively may be the last remaining remnants of neutrality in the building construction licensing issue. Each organization at the headquarters level is firm in its position of not taking a stand on licensure either way. The National Association of Home Builders attests that licensure has "historically been a matter best handled by individual state and local building associations" and therefore . has not adopted any official policy on the issue. The Associated General Contractors of America has also elected to defer the issue to the local chapters. As a result, some of the local AGC chapters have made demonstrative attempts to enhance the credentials and foster the registra­tion of the constructor.

For example, the North Dakota AGC Chapter, in concert with the Construction Management & Engineering Department at North Dakota State University, originated a comprehensive proposal in 1985 for a contractor registration program. The program provides model testing criteria and requirements for adoption at either the national or state levels. It suggests that a "national committee be appointed in order to maintain continuity and ultimate success". In discussions with one of the AGC representatives responsible for the proposal, it was pointed out that the document is a proposal for establishing a model of criteria for the testing and certification of the constructor and not to be construed as a model for legislative licensing by the states. Within the concept of the distinction between registration and licensing, the proposal suggests that registration can be accomplished by con­struction industry organizations instead of government boards. In effect, the proposal is a guideline for self regulation of competency for constructors by the practicing constructor.

The one construction group that appears to be gaining licensure support from the rank and file of its members is the established home builder. According to the National Association of the Remodeling Industry, most career home builders and remodelers agree with the general concept of licensing. As one spokesman stated, "It is not logical to license plumbers and electricians and not license general contractors, who have a lot more responsibility." The spokesman further stated that licenses in some states are too freely issued without sufficiently examining the capabilities of the applicants. "Issuing licenses without testing is giving credibility to everyone, even the guy who isn't reliable," he said. The problem is that what passes for licensing is really just a form of registration and doesn't insure credibility or competency, and, as the spokesman declared, "credibility is the one thing our industry has been fighting for."

Although only 7 states currently have competency licensing law requirements for both residential contractors and home repair and remodeling contractors, a recent poll conducted by the National Remodelers Council concluded that solid backing is a reality. Asked if they would support an industry-developed, model state licensing act for residential contractors as a means of encouraging their state to adopt such legislation, 60% of those surveyed said they would. Only 1.3% said they would not support such a move, while 27% were unsure. Figure 1 graph­ically depicts the results of the survey.

STATE REGULATIONS AND PRACTICES

The several states which have on-going competency licensing requirements are strong in their support of the practice to regulate building contractors. As an example, the Department of Consumer Affairs of the Contractors State Licensing Board of California recently announced a contractors amnesty program to encourage the reduction of unlicensed contractor practice. "There are three main reasons why the unlicensed contractor is one of the construction industry's biggest problems in California," the DCA stated. One, they hurt the industry's image. Each year, thousands of consumer complaints are received which are mostly the result of the work of unlicensed individuals unaccountable for their abuses. Second, unlicensed contractors represent unfair competition in the construction market­place by avoiding paying taxes and state benefits such as unemployment and medical service. The DCA points out that illegal contractors can and do undercut legitimate business operators on price. Third, the DCA states that, with con­struction being California's second largest industry, the activities of up to 200,000 unlicensed contractors account for a significant part of the "underground economy". The term refers to illegal activities in which billions of dollars change hands each year without taxation. It is estimated that the illegal practice results in a $2 to $3 million loss of annual revenues in the state of California.

The State of Utah's contractor licensing require­ments places a unique and appealing emphasis on the candidates' managerial skills. Recognizing that the business of building construction includes competition between managers, Utah requires their builders to demonstrate expertise in such managerial areas as planning, scheduling, controlling, decision making, communications, and other executive talents such as human relations, leadership, and money management. Utah wants to insure that their builders are managerially competent as well as technically proficient.

Figure 2 graphically illustrates the state builder licensing laws in categories of license with exam, license without exam, non-residence license requirements only, and those states which have no licensing requirements for builders. Table 1 provides a detailed analysis of builder licensing laws on a state-by-state basis, including the amount and frequency of renewal

fees, bonding and insurance requirements and other special requirements of a unique nature.

OVERVIEW

The issue of competency licensing among the sovereign states remains polarized. Those states which embrace testing requirements for their builders are fiercely protective of such laws. None of the regulatory states has evidenced the slightest bent toward testing moderation and most continue to strengthen their requirements for testing and demonstrations of competency. On the other hand, the states which have no competency testing requirements are apparently contented with the status quo of their construction industry practices. Such states appear comfort­able with the efforts and effectiveness of local building department officials, as well as the historic performance of the established builders in the state.

Construction Practitioners

The controversy is also found among the building construction practitioners. Those with long established companies in non-regulatory states seem to generally prefer the absence of state

controls. Some argue that states with tough licensing requirements have them for the wrong reasons. "The State of Florida has a licensing requirement primarily to keep non-resident builders out," one contractor recently stated. "It doesn't work however," he added, "because all one has to do is have a principal on the project team registered and that takes care of

the state requirement." Concurrently, other contractors argue that licensing laws breed "good-ole boy" practices. "It's who you know on .the board that counts," they say, "and not how well you build buildings."

Building Owners

Consumers of construction, the owners, have yet to be heard en masse regarding the issue of competency licensing. The Business Roundtable, however, in reporting on how to choose a building contractor, observes that "the two main questions _.to be determined are the capacity of the contrac­tor to do the work and his ability to manage the project in a manner satisfactory to the owner." -The Roundtable further recommends that a list of qualification factors be developed as screening criteria to be used in selecting the most . qualified contractor for the project at hand. The recommended checklist of criteria for prequalifying contractors includes:

Today, most sophisticated owners, both public and private, use some form of prequalification screening criteria along with price proposals to select their builders. The existence of state licensing laws appears to play little or no role in the owner-contractor selection process.

Corporate Suretyship

One item on the owners prequalification menu normally includes bonding capacity. The Surety Association of America points out, however, that few owners, government or private, fully under­stand what a surety does in providing the required bonds. The major goal of the corporate suretyship is not to insure that a good, sound, .quality building is built, but to minimize the chances of default by the contractor on a bonded job.

In the process of evaluating contractors to determine if they can perform a given contract, the surety is usually concerned with the finan­cial ability of the contractor, the management and organization ability, his expertise for the kind of work involved, and his demonstrated capacity to finish the contract in the required time. Licensing requirements by the states are normally not a primary consideration of the surety companies.

CONCLUSION

It is not within the scope of this paper to support either side of the state licensing controversy, but rather to explore basic issues involved, analyze the purpose and intent of licensure, and hopefully prompt further study and consideration by those interested in the advance­ment of professionalism, ethics, and competency in our industry.

The issue of licensure may be characterized as one of personal opinions. There is no widespread failure of buildings in non-regulated states. Competency licensing of the builders would not have prevented the tragic Kansas City Hyatt­Regency Hotel disaster in 1981 which killed 114 people, or the more recent collapse of the L'Ambiance Plaza apartment building at Bridge­port, Connecticut which took 28 lives. There is no discernible difference in the quality of construction between regulated and non-regulated states. The business of construction is viable in both camps. Why, then, have licensing at all? What real factors control the quality of our buildings? Should the states be involved or should the industry be self-governing? What role should licensing have in protecting public welfare and promoting professionalism and ethics in construction? These and other questions regarding the directions our industry should take toward licensure are growing concerns yet to be fully addressed and answered.

REFERENCES